A Complete Guide to Error-Free Property Valuation?

If you are looking to sell your property and you have no idea how to proceed further in selling your property in the open market, then my friend, you need expert guidance to tell you the dos and don’ts of property valuation and how you can sell your property at a great market price. Come, let’s understand the process of Property Valuation in more detail. 

What is Property Valuation?

Property Valuation is a method that is used to closely analyse the net worth of a property. This concept of property valuation is a kind of new concept to the Indian Society because we don’t used to have such a system but with the progressive society, the paradigm of the property valuation has been shifted whereby an individual who is an expert in the property valuation is appointed to analyse the whole situation of the property and then present a report that contains the accurate information that an individual is required. 

Parties who are required to have the Valuation of the Property  

The valuation of the property is not an essential requirement of the Buyer and Seller. Still, there are other parties also who are required to have the Property Valued by a professional valuer. These parties are as follows:

• Buyer of the Property: The main party who will be directly impacted by the valuation of the property is the buyer who is going to purchase it. The valuation report prepared by the valuer is important to the buyer because it will help him evaluate whether the price that he is paying for the property is worth it and whether the property he will be purchasing is free from any kind of encumbrance. 
• Seller of the Property: The next important person involved in the property translation is the Seller. This practice was usually not accepted in India. Still, with time, it has been received and has proven to be a good tool for Sellers as they will know the exact worth of their property, thereby not allowing them to resell the property at a lesser worth. 

• Investors: Sometimes the Buyer of the property can be an investor who is buying the property just as a mode of investment hence valuation helps them understand the property and its value in a better way. 

• Developer: Developers usually take the land and then develop it for further construction. Therefore, it is a good practice first to do the property valuation so that the developer can provide a good and marketable title to the individual buyers of the property. 

Importance of Property Valuation 

There are a plethora of reasons that run in favour of getting the Property Valuation from the right hands of the professional valuer. These important reasons are as follows:

• Encumbrances: The most important question that a valuation resolves is whether the property is free from any encumbrances and whether the buyer will be getting a good and marketable title. This means that no legal matters or charges are pending on the property being valued. 

• Mortgage: If the Buyer is taking any mortgage then the loan authorities will require the Property Valuation to release the funds. At the same time they also want to safeguard their interest on the property. Hence, getting the property valued becomes a necessity. 

• Getting the Price: Property Valuation helps the parties to the transaction, whether Seller or Buyer, get the exact amount of the property, thereby safeguarding their interests by getting or paying the exact market value of the property. This will help the Buyers and Sellers better negotiate with themselves. 

• Getting the Property Insured: Property Valuation helps the Buyer or Investor as they may understand the cap of insurance that will be required to safeguard their interests in the property. 

• Taxes: The report prepared by the professional property valuer also informs about the updation in the property’s taxes. It also helps the buyer or investor understand that the taxes on the property have been paid up-to-date and will eventually help them understand the tax regime on the property. 

Factors Affecting Property Valuation

Some factors affect the Property Valuation. These factors play an important role in arriving at the best valuation because the professional valuer is required to keep these factors in mind while preparing their valuation reports. These factors run as follows:

• Demand of the Property: The Demand for the property is directly proportional to its value. When the demand for the property is high and supply is on the lower side its value will also be higher and if the demand in the market for property is low and higher supply then the Property Value will be lower. 

• Income: The per capita income of individuals plays a more important role because if the earning capacity and income of the individuals are greater, then this will be directly proportional to the creation of the demand for the property, hence its value. 
• Location of the Property: It is a general rule that a property is valued according to its location. Even the price of the property is directly proportional to its value. If the property is situated in a metro city and close to amenities, then the value of the property will be higher, and if the property is situated in a small town or rural area, then the value of the property will be on the lower side. 

• Development of the Infrastructure: As we have already discussed in the above-mentioned sections of the property, the developed infrastructure also plays an important role in shaping and determining the true valuation of the property. The more developed the infrastructure, the more valuable the property. 

• Policies of the Government: Usually, the government issues various policies to make the properties accessible to the general public and hence decides the price of the property accordingly. 

Property Valuation Methods

There are some set methods that have been derived over the years to arrive at the true valuation of the property. These methods are used to help the above-mentioned persons get the true valuation of the property done with the help of a registered valuer. These valuation methods are as follows:

• Cost Method of Property Valuation: This is one of the widely and commonly used Property Valuations as it takes the cost of the property for replacing or reproducing it without applying the depreciation factors on the very first instance. In this method of property valuation, the value of acquiring the land and construction are taken into consideration separately. Lastly, all the factors that will constitute the depreciating factors such as the age, and the condition will be deducted in order to arrive at the true valuation of the property. 

• Market Comparision of Property Method: As the name of the approach suggests, a market comparison is required in order to arrive at the Property Valuation. In this type of Property Valuation method, the valuation of the other properties recently sold in the same locality will be taken to arrive at the correct Property Valuation.

• Development Method of Property Valuation: As the name of the Property Valuation suggests the potential for development is assessed by the valuer. The Valuer of the property takes into account not only the potential for development of the area but also the applicable regulations, permissible floor area, and the demand for the development of the region.  

• Income Method of Property Valuation: The Income generated by the property will be taken into consideration for arriving at the true Property Valuation. This method is widely used for commercial properties, valuing the rental income-generating capacity of the property. It also depends upon its location, operating expenditures, and the value of the neighbouring property. 

What are the probable Errors during Property Valuation?

As we have discussed in the preceding sections of this Article the process of Property Valuation is new to India. Because of this reason, it is very evident that some errors may occur that need to be rectified in order to arrive at the Property Valuation properly. The standard errors are as follows:

• Overlooking the Current Market Situation: Sometimes, the current market situation and trend must be considered in order to arrive at the correct Property Valuation. Overlooking the current market may result in an error in the valuation of the property. 

• Relying on AI Tools: There are many AI websites and software available around the globe that help assess the value of a property based on widely used public opinions, but these AI tools cannot be blindly relied upon as every property has a different set of characteristics and also depends upon the local market. 

• Property Improvements: It is always believed that the newer the condition of the property, the higher its price will attract. Hence, the cost of renovations is overly added to the property, which is not its exact worth, thereby making an error in the Property Valuation.

• Demanding an Excessive Initial Price: Sometimes, setting the initial price to be on the higher side proves detrimental to arriving at the correct Property Valuation. 

• Overlooking the Economic Conditions: Sometimes, when arriving at the Property Valuation, the prevailing economic conditions in the country must be taken into consideration, and ignoring them may lead to an error in the Valuation. 

• Not doing proper Market Analysis: It is essential to do a thorough market analysis and then compare the sale of the neighbouring property. If this step is missed in the Property Valuation, there is a huge error in arriving at the true Property Valuation. 

• Being Emotional: Property Valuation is a mathematical approach based on an N number of factors, but sometimes Sellers attach their emotions to the valuation, which directly creates an error. 

• Combining Tax Assessment and Property Valuation: One of the biggest errors in Property Valuation is combining the property value for tax assessment and the market trend. Property Valuation is a different concept and it should not be merged with the assessment done for taxes. 

• Not taking advice from an Expert: It is always advised to take advice from the desk of an expert because relying upon the AI tools or doing it by yourself never gives you the correct Property Valuation as the one given by a Property Valuer. Therefore, it is better to seek the right guidance. You may connect with us to get your property valued from the right hands. 

Conclusion 

Property Valuation is a method that gives the exact worth of the Property. Property Valuation is dependent upon economic conditions, market conditions, per capita income of the individuals, and so on. Because of these changing dynamics, probably, the Property Valaution may not become normal therefore the common mistakes in the Property Valaution are required to be followed to get the perfect Property Valuation. 

FREQUENTLY ASKED QUESTIONS

Q1. Why is Real Estate Valuation so difficult?

Ans1. It is difficult due to multiple factors such as the condition of the property, location of the property, market trend, economic conditions, etc. 

Q2. What are the challenges in Property Valuation?

Ans3. The frequency of changes in the market and economic conditions are the two most common challenges faced during property valuation. 

Q3. Why is Property Valuation important?

Ans3. Property Valuation is an important tool that helps Buyers, Sellers, Business Owners, and Investors to know the exact net worth of the property. 

Q4. How do market conditions affect the Property Valuation?

Ans4. The market conditions are subject to change which makes it difficult to compare the market conditions and property value at two different times. 

Q5. What are the challenges and limitations faced by Real Estate Property Valuation Professionals?

Ans5. There are a certain number of reasons that pose challenges and are limited to the Valuation Professionals and these range from economic conditions, market conditions, legal and regulatory framework, etc.